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Biden’s claim that Nobel winners say his plan would ‘reduce inflation’

(Alessia Pierdomenico/Bloomberg)

“You had a total of 14 — I think it was 14 — Nobel laureate economists in economics saying this is going to — what I’m proposing is going to reduce the inflation, et cetera.”

— President Biden, remarks at a news conference in Rome, Oct. 31

“I had 17 Nobel laureates in economics send me a letter recently saying my proposals would actually reduce inflation, diminish inflation.”

— Biden, interview at CNN Town Hall, Oct. 21

“Seventeen Nobel laureates spontaneously — Nobel laureates in economy — sent me a letter three weeks ago saying it will also reduce, not increase inflation.”

— Biden, speech in Scranton Pa., Oct. 20

“By the way, 15 Nobel laureates in economics released a letter yesterday arguing that exact same point. They said, and I quote — and this is from 15 Nobel laureates in economics — quote, ‘Because this agenda … ‘ — the one I’m talking about, mine — ‘Because this agenda invests in long-term economic capacity and will enhance the ability of more Americans to participate productively in the economy, it will ease long-term inflationary pressures.’ It will ease it.”

— Biden, remarks on the U.S. economy, Sept. 16

This is an example of how a carefully worded sentence can, over time, get morphed into shorthand that might lose some nuance.

In September, back when Biden’s “Build Back Better” plan called for $3.5 trillion in spending on top of a bipartisan infrastructure plan, 15 recipients of the Nobel Memorial Prize in Economic Sciences released a joint letter praising his initiative. (The number later grew to 17.)

“While we all have different views on the particulars of various economic policies, we believe that key components of this broader agenda are critical — including tax reforms that make our tax system more equitable and that enable our system to raise the additional funds required to facilitate necessary public investments and achieve our collective goals,” the letter said. “Because this agenda invests in long-term economic capacity and will enhance the ability of more Americans to participate productively in the economy, it will ease longer-term inflationary pressures.”

With inflation a growing concern for many Americans, the last line was a political gift for the White House. (It has also been cited by other Democrats.) Biden read that line verbatim in his first reference to the letter. But then over time, his references to the letter have morphed into something that might suggest to listeners the plan would reduce inflation now, not the potential for inflation in the future.

Moreover, Biden’s plan has changed significantly. The bipartisan infrastructure plan remains in place — it just needs to pass the House — but the rest of the spending proposal has been pared back to $1.75 trillion. The tax changes lauded in the letter — higher taxes on the wealthy and corporations — have been largely dropped. Lawmakers may even tinker with a 2017 tax provision that limited the deduction of state, local and property taxes in a way that would benefit the wealthy.

So the Fact Checker sent an email to every signer, asking two questions:

1. Does the “longer-term inflationary pressures” phrase mean the Biden plan would reduce inflation?

2. Have the changes in the proposal affected how you view the plan’s impact on long-term inflationary pressures?

We have heard from six signers so far and have collected their responses below. We will update this as we hear from more. The names are listed in the order in which the signers are listed in the letter. None of the responses indicated that any signer was backing away from the letter — but some indicated that the proposed changes have lessened the potential impact on inflationary pressures.

Joseph Stiglitz, professor, Columbia University

Because this agenda invests in long-term economic capacity and will enhance the ability of more Americans to participate productively in the economy, it will ease longer-term inflationary pressures.

This simply means what it says: it will have positive “supply side effects” which reduce inflationary pressures.

My judgment was that in the earlier version, with almost all of the additional spending “paid for,” the net demand side effects were likely to be minimal. Obviously, without detailed knowledge of the final package, it's not possible to do a precise overall assessment. One needs to look at both what taxes/revenue measures have been taken out, what spending measures have been taken out, and to what extent it continues to be paid for.

From the reports that I’ve seen, the statement is likely to be still true, though with the scaling down of the measures, the magnitudes of the effects are reduced.

Peter Diamond, professor, Massachusetts Institute of Technology

The key part of the prior sentence is: public investments.

Investments in physical and human capital raise potential output. Actual inflation depends on multiple factors, including demand relative to supply (the item referred to in the letter). Many other elements are involved, making it hard to separate out the size of the impact on inflation of any one element.

If by reduce inflation you mean inflation would be lower than otherwise, that is consistent with the statement. If you mean that inflation will go down in the period after the bills are passed, that is not an implication of these slow-working effects.

Out of a context, “reduce inflation” has both meanings — lower than otherwise and going down.

Eric S. Maskin, professor, Harvard University

I don’t know enough about the bill as it now stands to comment on whether it is likely to ease inflationary pressure.

Christopher Sims, professor, Princeton University

The package would still reduce “longer-term inflationary pressures,” even with some of its revenue-raising measures reduced, because of the supply-side effects it lists. But in the medium term, there are demand-side sources of inflationary pressure as well.

A version of the Biden package including some substantial and politically difficult revenue-raising measures would probably not add to medium-term inflationary pressures. Cutting revenue-raising components out of the Biden package increases the medium-term pressures.

This would make the Fed’s job more difficult and might therefore raise the risk (relative to the risk with the original Biden package) of either a more extended period of above-target inflation or of a recession. But the risk to the economy of not passing this legislation, thereby reinforcing the view that our institutions can’t act to deal with our central economic problems, is much greater.

Sir Angus Deaton, professor, Princeton University

I think the letter means what it says which is clear enough. I don’t know what “it would reduce inflation” means. Certainly not in the next few months. The package would do more without the giveaways to the wealthy, but would I still sign for a compromise package? Probably.

Daniel McFadden, professor, University of California at Berkley

The Nobel letter talks about long-run pressure on inflation, and opines that improving the nation’s infrastructure, both physical and human capital, will reduce this pressure. This is sound and uncontroversial economics — increasing supply and capacity reduces the bottlenecks that fuel inflationary surges.

The inflation we are seeing right now seems to be coming primarily from supply and coordination issues across the world economy as we emerge from the covid pandemic, and to some degree from the pent-up demand coming from wealth accumulation during the pandemic, but not substantially from overall excess demand.

There is a risk, however, that the current surge will morph into more general inflationary expectations. Increasing current government deficits by a shakily financed BBB could add to this. The responsible public policy is to push forward with the infrastructure bill and BBB program, but tie initiation of investments authorized in these bills to financing that is consistent with managing current inflationary pressure.

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